Reimbursement for mileage is the concern of many in this day and age – from business owners to employees – any company where workers must operate a vehicle as a part of their business activities fits into this category. Today we’re going to closely examine the best practices of mileage reimbursement from many points of view, fleshing out the details.
The Way Mileage Reimbursement Works
Fundamentally, there are three main situations where mileage reimbursement becomes relevant for the relationship between an employer and their workers. Before we break down these categories, it’s important to note that in most states, employers are not required by law to provide a mileage reimbursement plan at all – it’s just that most do, given the typically high costs associated with doing car mileage as part of an employee’s job. Let’s take a look:
When An Employee Owns or Leases a Vehicle
In this scenario, it is very common that an employer will reimburse their employees for both costs associated with the operation of a vehicle and the cost of owning a privately owned vehicle. Though this is not always the case, as employees may do plenty of personal trips on their own time, thus making it inappropriate for their employer to pay for a substantial amount of the fixed costs related to the vehicle’s ownership.
When An Employee is Provided with a Vehicle
When an employee is given a vehicle by their employer, variable costs tend to be the focus of any reimbursement policy. These costs include such things as gas prices, parking fees, or tolls. In some cases, employees might do enough mileage for their employers that maintenance and service costs become a part of any reimbursement payment they receive.
An Employee is Also Self-Employed
Living in today’s gig economy, it has become fairly common for employees who work for one company to independently contract outside of that, in which case two separate records or mileage logs need to be kept. People often ask “how does a mileage tax work?” and the answer is simply that people who are self-employed claim tax deductions on the mileage they do through the IRS. Indeed, that is also how to calculate mileage reimbursement if one is entirely self-employed too.
Consequently, it is sometimes the case that people in these situations claim deductions through contracted business-related trips that they do via the standard mileage rate while maintaining a different type of plan with more concrete employers that they work with to account for the miles they do for that company or person.
This is why keeping records for all kinds of mileage one does becomes so paramount for those who juggle a number of projects – let’s demonstrate this scenario with a hypothetical example:
- Darnell works as a teacher. As part of his work, he has a contract with a language school and drives a lot around his hometown of Indianapolis to visit the school’s clients and teach business English. He also teaches outside of the language school privately to further supplement his income – as a result, he has a mileage log both for the school and for his private business trips.
How Much Should I be Reimbursed for Mileage?
As the above situations make clear – how much an employee should be reimbursed really depends on a combination of what kind of setup any given worker might have and how their employer chooses to react to that.
Some employers simply look to the Internal Revenue Service’s (IRS) federal mileage reimbursement rate, which is equivalent to the standard mileage rate for self-employed persons who claim tax-free deductions from the IRS in a similar way. For 2024, that rate is 58.5 cents per mile – an amount most employers tend not to exceed when themselves deciding on a cost per mile rate to pay their employees.
Moving forward, we’re going to hone in on the various accountable plans available for employers and employees alike.
Mileage Reimbursement: Rules and Plans
There are numerous plans available for a variety of situations; with most plans being advantageous from some points of view and slightly deleterious from others. We’ll be covering some of the most common situations and how they relate to the employee mileage reimbursement rules.
- Using The Federal Mileage Reimbursement Rate: frequently, employers just use the 2024 IRS mileage rate of 58.5 cents per mile driven. This keeps things simple, and it also might be considered somewhat generous – this is mainly because this rate is set by the IRS as a reflection of all the costs associated with owning and operating a vehicle. Naturally, all of the miles logged should be purely for business reasons
- A Simple Car Allowance: while it may sometimes be unfair to employees, a fixed amount in the form of a monthly lump sum for mileage is often utilized – this sum is meant to account for all relevant costs, though sometimes it does not.
- FAVR: something resembling a unique combination of both a fixed amount along with a variable rate, FAVR is an interesting solution that many employers choose to implement. With this arrangement, a lump is paid as a fixed amount and a variable cost per mile travel rate is also accounted for. Obviously, the latter part of this equation incorporates a rate that is far lower than the aforementioned 58.5 cents per mile.
The Most Effective Mileage Tracking Choices
There are many ways employees can track their mileage, and strangely, many still opt to take care of their tax accounting responsibilities through either Microsoft Excel or even a paper-based logbook. The reality however is that there is a tonne of useful apps and pieces of software out there that help employees and independent contractors optimize the process of logging their mileage so that they can learn how to deduct mileage on taxes in the most efficient way.
We haven’t the time to cover the entire market of apps and software out there; though we recommend choosing a provider which contains a team’s dashboard as one of their features. Using a variety of apps for many years has led us to hold one provider above the others, and that company is MileageWise. From those that we tried, they simply offer the best mileage reimbursement workflows on their team’s dashboard – which can easily be accessed by all employees via a desktop PC. Their 3+1 modes of auto-tracking also made logging our trips a breeze – all that one needs to do is press a button and the app will know when your trip has ended based on the fitness activity, i.e. the steps the driver takes after leaving their vehicle.
Additionally, self-employed people we consulted with found the MileageWise app and its complimentary dashboard to be particularly reliable. The app’s built-in IRS auditor was lauded as a particular favorite – the software examines and corrects 70 logical inconsistencies before allowing a user to print their mileage log and submit it to the IRS.
